A recent report from the Resolution Foundation has found that by age 30, people whose parents own property are more likely to purchase property themselves, reflecting the increasing importance of parental property wealth.
The Resolution Foundation is a non-partisan and award-winning think-tank that works to improve the living standards of those in Britain on low to middle incomes.
According to their research, during the 1990s and 2000s, people over thirty whose parents owned property were only twice as likely to acquire property themselves, but post-2010 the same group are three times as likely to buy their own property.
It has been suggested this growing disparity has been caused in part by the dramatic rise in property prices in the last decade and the stagnation in wages, which for many have been below the rate of inflation.
Financial support for home-owning dreams
The report also highlighted the financial help many buyers need from their parents, to ensure they can take their first steps on the property ladder.
Figures in 2017 from Legal & General showed the ‘Bank of Mum and Dad (BOMAD)’ as it is known, loaned approximately £6.5billion to help around 300,000 children purchase properties – effectively making BOMAD the UK’s ninth biggest mortgage lender.
The importance of this funding source is replacing other vital factors in the home purchase process, like how much the potential buyers actually earn, which typically dictates the amount they can borrow.
Currently, without financial support from other sources, a first-time buyer would need around 18 years to save up for a deposit, if they rely solely on savings from their own disposable income – up from 3 years to raise a deposit just two decades ago.
However, this figure is dramatically reduced when their parents own a property and offer help to their children buy a property.
The Resolution Foundation report highlighted that young people moving out of the family home their parents owned, are 9% more likely to own their own property themselves within 12 months.
Helping with a mortgage deposit
The most common way parents help their children is by providing some or all of the funds required for the necessary deposit to qualify for a mortgage.
Typically, the average loan given to first-time buyers from family members is approximately £24,000. But the determination to keep climbing the property ladder, sees almost 20% of first-time buyers returning to BOMAD for a further loan as they look to step-up to their next home.
Parents who want to help their children with a deposit can either gift them the money, or lend it to them. The gifting of money for the deposit is more typical as most mortgage providers will not allow the deposit to be loaned by parents.
If a loan is the preferred arrangement for the parents, it would be sensible to ensure that the proposed mortgage lender would agree to this loan from the parents before proceeding in this way.
However, as with most financial transactions in the UK, there are potential consequences with both options.
Gifting money – this can have consequences for Inheritance Tax. The donor parent must live for seven years after gifting the money for the amount to be exempt of tax, with any gifts made less than seven years before death, counting towards the threshold.
Lending money – some parents lend rather than gift money to their children, expecting monthly payments or a future lump sum, often when the property is sold. A loan agreement should be drafted and signed by both parties to ensure protection for the parents.
Mortgage lenders will ask the source of the borrower’s deposit and if it’s BOMAD, they may ask parents to sign a form confirming they are not expecting this money back.
If the money is to be repaid monthly, the borrowers will have to disclose this amount, as it will help determine the size of the mortgage they can afford.
Ideally the loan agreement between the parents and their children will set out what will happen to the money if circumstances change, if one of the parties dies, or if the parent needs the money back at any point, for example.
This approach may sound a little too formal for a lot of parents, but in our experience, it pays to cover all eventualities; never assume the relationship will always be amicable, especially where family and money are concerned.
A step up the property ladder but tread carefully
However parents choose to help their children buy their own home, there are pitfalls and we would always recommend a discussion with a lawyer to understand the best options.
We know you want to help, but there is no benefit of rushing in and putting your own financial future in jeopardy. It might seem unlikely at the outset, but your child could divorce or fall into money trouble, which should not impact your quality of life.
If your children can’t meet their mortgage payments, you could even face demands to pay and you could face a big tax bill if you take the wrong type of loan.
There is a growing range of funding options to make it easier for young people to buy, but it’s vital you do your homework before stepping in. Please get in touch with Ansons’ Elaine Durkin on 01543 431180 or firstname.lastname@example.org and Elaine will happily advise on the best way to help your children buy their first home.